Consider the three stocks in the following table. P t represents price at time t
ID: 2821062 • Letter: C
Question
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period.
Calculate the first-period rates of return on the following indexes of the three stocks: (Do not round intermediate calculations. Round answers to 2 decimal places.)
An equally weighted index?
P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400Calculate the first-period rates of return on the following indexes of the three stocks: (Do not round intermediate calculations. Round answers to 2 decimal places.)
An equally weighted index?
Explanation / Answer
Equally weighted index return is calculated as the average of each stock return for the period.
The divisor (for average) is no of stocks.
But when stock split happens , the divisor changes. ie in this case the divisor changes after period 2,
For period 1, there is no stock split ; hence the equally weighted return is imple average of each stock's returns
Return of A = (P1-P0)/P0 = (95-90)/90 = 5.56%
Return of B = (P1-P0)/P0 = (45-50)/50 = -10%
Return of C = (P1-P0)/P0 = (110-100)/ 100 = 10%
Equally weighted index return = (5.56% + (-10%) + 10% ) / 3
= 1.852%